Sunday, April 8, 2018

Weekly Market Summary

Summary:  Trade war rhetoric is driving US equities. This week, for the third time in the past month, the start of a sustained rally was clobbered by administration threats. Conversely, every interim recovery has come on the heels of conciliatory language. Long story short, what happens next in the equity market is very much a function of which trade posture the administration adopts next. Longer term, it's unlikely much of the current rhetoric will make into actual policy as it suits no one's economic interests.

Volatility has shot up in the past two months. Remarkably, investors now view volatility as the "new safe haven" and a "dependable bet." To that end, speculators are now positioned net long Vix futures to a near record extent; in the past decade, that has reliably coincided with at least a near term top in volatility.

This past week, SPX closed below it's 200-dma for the first time in over 400 days. The end of prior long streaks have not coincided with the start of bear market since 1962. Returns after the end of these long streaks have been exceptionally strong.

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US equities gained three days in a row last week for the first time in a month but a massive gap down on Friday and further follow through selling turned the markets negative for the week and (mostly) for the year (from Alphatrends). Enlarge any chart by clicking on it.

Friday, April 6, 2018

April Macro Update: Markets Might Be Wobbly But The Economy Is Fine

SummaryThe macro data from the past month continues to mostly point to positive growth. On balance, the evidence suggests the imminent onset of a recession is unlikely.

The bond market agrees with the macro data. The yield curve has 'inverted' (10 year yields less than 2-year yields) ahead of every recession in the past 40 years (arrows). The lag between inversion and the start of the next recession has been long: at least a year and in several instances as long as 2-3 years. On this basis, the current expansion will likely last through 2018 at a minimum. Enlarge any image by clicking on it.

Wednesday, March 21, 2018

Interview With Financial Sense on What To Look For Ahead of an Equity Market Peak

We were interviewed by Cris Sheridan of Financial Sense on March 13th. During the interview we discuss the macro-economic environment, the housing market, current market technicals and the financial performance of US companies. One theme of our discussion is what to look for ahead of the next bear market in US equities. Another theme is a potentially bullish set up for US treasuries over the next several months.

Our thanks to Cris for the opportunity to speak with him and to his editor for making these disparate thoughts seem cogent.

Listen here.

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Tuesday, March 20, 2018

Fund Managers' Current Asset Allocation - March

Summary: Fund managers came into 2018 very bullish equities. Cash levels had fallen to the lowest level in 4 years. Allocations to global equities had risen to the highest level in nearly 3 years. Bond allocations were at a 4 year low. Our view at the time was that "this is a headwind to further gains" in equities. That post is here.

Since then, global equity allocations have fallen and cash balances have risen. Investors are no longer at a bullish extreme, but the equity shakeout certainly did not make them fearful.

In the past 8 months, US equities have outperformed Europe by 13% and the rest the world by 5%. Despite this, fund managers remain underweight the US. US equities should outperform their global peers on a relative basis.

Fund managers remain underweight global bonds by the greatest extent in 4 years. US 10 year treasuries have outperformed US equities (NYSE) by nearly 400bp in the past two months.

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Among the various ways of measuring investor sentiment, the Bank of America Merrill Lynch (BAML) survey of global fund managers is one of the better as the results reflect how managers are allocated in various asset classes. These managers oversee a combined $600b in assets. Our sincere gratitude to BAML for the use of this data.

The data should be viewed mostly from a contrarian perspective; that is, when equities fall in price, allocations to cash go higher and allocations to equities go lower as investors become bearish, setting up a buy signal. When prices rise, the opposite occurs, setting up a sell signal. We did a recap of this pattern in December 2014 (post).

Let's review the highlights from the past month.

Overall: Relative to history, fund managers are overweight equities and cash and underweight bonds. Enlarge any image by clicking on it.
Within equities, the US is significantly underweight while Europe, Japan and emerging markets are all significantly overweight. 
A pure contrarian would overweight US equities relative to Europe, Japan and emerging markets, and overweight global bonds relative to a 60-30-10 basket. 

Sunday, March 11, 2018

Weekly Market Summary

Summary:  The Nasdaq closed at a new all-time high (ATH) on Friday. It has risen 6 days in a row. A number of studies suggest that it should continue to rise further, and that SPX should follow it, probably also to a new ATH. That is the near term set up as equities enter March options expiration week.

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Last Friday's 2% intraday turnaround continued this past week. US equities gained 4% (from Alphatrends). Enlarge any chart by clicking on it.